One of the characteristics of the anti-globalisation movement personified by US President Donald Trump is its apparent opposition to free trade. Free trade is not only associated with the globalisation agenda of the liberal elite but is also held responsible for the shipping of jobs and production overseas where cheaper labour and cheaper raw materials can be exploited, leaving at home nothing but crumbling factories and swathes of unemployed workers. Hence a considerable part of Trump’s “America First” programme appears to be devoted to distinctly anti-free trade measures, such as increased protectionism and tax penalties for firms relocating jobs overseas.

What should be the reaction of Austro-libertarians to this phenomenon? Do we not believe that free trade is almost the very essence of freedom and the fountain of prosperity? Should we not oppose any attempt to restrain trade by either tariffs or regulations? On the other hand, what are we to do when such policies are seemingly associated with nothing but destitution and misery for a significant proportion of the population?

For libertarians to simply repeat like a broken tape that trade should be left “free” runs the risk of considering only surface phenomena while failing to examine deeper, underlying problems. In the first place, of course, the association of the globalising movement with free trade is patently false. Those behind this movement are not in favour of genuine free trade; rather, they promote a heavily managed trade environment – one governed by trade agreements, trade deals, and a complex myriad of rules and regulations which favour only large corporations and the politically well connected. Indeed, trade agreements and trade deals are the antithesis of free trade, the latter of which demands a complete absence of the state from any involvement in trade. The terms “free trade agreements” and “free trade deals” are therefore nothing more than meaningless doublethink. A grave mistake that the anti-globalisation movement is likely to make is to confuse political globalisation – the consolidation of and intensified co-operation between states and state institutions, which is a relatively new phenomenon – with economic globalisation, which is private institutions trading peacefully and voluntarily on terms agreed by themselves, a situation which has existed for centuries. Political globalisation should be opposed bitterly while economic globalisation and the expansion of the international division of labour should be promoted. The bigger problem, however, is the fact that free trade today, if it is genuinely free, is carried out in a context where there is a gross, underlying violation of private property rights – in other words where the players who are demanding freedom are benefitting from the curtailment of other people’s freedom. For instance, banks are restrained from being “free” by heavy regulation and oversight because their lending activities have the tendency to blow up bubbles which lead to crippling busts. However, the reason for this tendency is that banks are, simultaneously, legally privileged (by the ability to hold only fractional reserves) and economically privileged (by being the first parties to receive new money that is freshly printed central bank – money which is itself, of course, subject to legal tender laws and of which the central bank is legally privileged as the sole issuer). It would be a travesty for Austro-libertarians to respond to any call for increased bank regulation by pointing out that such regulations are a violation of freedom. While this is true in and of itself, the real problem is clearly the state’s monopoly money and its dissemination through fractional reserve banking. To take another example, entities that are endowed by the state with a monopolistic or quasi-monopolistic privilege are normally able to charge higher prices to their customers and to pay lower prices to their suppliers. If, in response to the resulting “obscene” profits and high prices, the state proposes to regulate the prices of the entity’s products or tax away a significant portion of its profits, Austro-libertarians pointing out the pitfalls of price control and the injustice of taxation would be speaking the truth as far is goes. However, they would be ignoring the bigger, underlying problem which is the entity’s monopoly privilege, and that what is really needed is to rescind this privilege in order to open up the market to genuine competition. Only in this context is the freedom of firms to set prices both legitimate and economically beneficial.

When it comes to free trade, part of the underlying problem that is easy to ignore is that, of course, US workers are burdened by minimum wage laws and employment regulations which, to any employer, makes them relatively more expensive than workers overseas who may not be burdened by such interventions. However, the bigger “macro” problem is the fact that trade today takes place with the exchange of state-issued, paper currency which can be expanded at will, rather than with “sound” money such as gold or silver. The added complication in the case of the United States is that it is, currently, the issuer of the world’s reserve currency. What we will see is that, even without minimum wage laws and employment regulations, this would cause jobs to vanish overseas.

When the entire world is trading with “sound” money such as gold the prices of labour in the US and overseas depend upon the relative supply and demand for gold and for labour in each location. In which circumstances could labour be cheaper overseas? (By “cheaper” we mean that wages are lower per unit of production and not per hour. Wages in developed countries are higher per hour because labourers there can produce more in each hour on account of the relatively high amount of capital goods per worker – more tools, machines, factories and so on. Wages in poorer countries may be lower per hour because each worker can produce less per hour, but in equilibrium they would not be lower per unit of production). If labour is cheaper overseas then it means there is a relatively higher supply of money and a relatively lower supply of labour in the US while there is a relatively lower supply of money and a relatively higher supply of labour overseas. Employers therefore divert more of their funds to employing workers overseas in order to take advantage of the lower wages. This, however, is simply the correction of a disequilibrium which will reach its own natural limit. As money leaves the US then money there will become relatively scarcer while the amount of labour will remain the same and so US wages will fall; the new money flowing into countries overseas, on the other hand, will cause wages there to rise. At some point wages both at home and overseas will equalise. Of course, if the reverse happens – that wages are higher overseas than in the US – then the opposite process will occur, with money being drawn out of overseas countries and coming home to the US to bid up wage rates there. All of this is part of the natural process of economising behaviour which seeks to employ resources across the world by directing them to their most highly valued use. Absent any further state interference such as minimum wage laws and onerous employment regulations, all workers, both overseas and at home, will end up employed at the same wage rate (per unit of production).

What happens, however, when we are trading not with “sound” money, such as gold or silver, but, rather, with a paper money which can be issued by the state at will? If the domestic state chooses to expand the supply of money then this will cause an effect similar to that we just outlined. The supply of money at home will increase causing local prices – including wages – to rise. Prices overseas, however, will not yet have risen on account of the fact that the new money has not yet reached there. This process takes places through the complicating factor of the exchange rates between currencies, which is itself, of course, a price and is subject to the same influences. If the US prints more money but the overseas country does not then the first firms to spend the newly printed money on foreign currency will benefit from the old exchange rate and will be able to obtain more foreign currency than they otherwise would have which they can then use for purchasing goods and labour from abroad. Firms will therefore divert more of their spending to importing resources and seeking foreign labour than they would domestic labour. For the majority of countries such printing of currency can have only a very limited effect. If the inflation is a one shot affair then, eventually, increased bidding for foreign currency with the newly printed money will cause the exchange rate to adjust, strengthening foreign currencies and weakening the domestic currency. Fewer units of foreign currency can be bought with the additional supply of domestic currency and so the attractiveness of foreign goods and services diminishes, vanishing entirely when the currencies reach purchasing power parity. Currencies reach a state of purchasing power parity when the exchange rate between currencies and between goods is harmonious. For example, if an apple costs two South African Rands or one US Dollar, then in a state of purchasing power parity one US Dollar would equal two South African Rands. At this point there is no additional benefit from buying goods and services from abroad than there is from buying them at home. If, on the other hand, the inflation is continuous then such continuation comes to be expected. This expectation of inflation will in and of itself cause a much quicker adjustment to the exchange rate than previously, thus nullifying, or at least blunting, the benefits to the recipients of the newly printed money, robbing them of the power to ship jobs and the supply of resources overseas. The only thing that is experienced is domestic price rises. Of course, if the continuous inflation becomes abusive then it sows the seeds of hyperinflation as bigger and bigger doses of inflation are required in order to “cheat” inflationary expectations until the inflation reaches such a degree that such cheating is no longer possible and price rises even begin to exceed the rate of inflation. By this point, needless to say, a country has a lot more to worry about that jobs being shipped overseas. Thus what we can see is that with both “sound” money and independently issued, national paper monies mechanisms exist which prevent a permanent loss of jobs and the sourcing of supplies from overseas.

The situation is different, however, where the issuer of the paper currency happens to be the issuer of the world’s reserve currency. This is the dubiously privileged position in which the US and the US Dollar finds itself today. For when a country is the issuer of the world’s reserve currency the price adjustment mechanisms that we outlined above, which prevent the permanent loss of jobs overseas, are disrupted.

The US Dollar became the world’s reserve currency partly as a legacy of the Bretton Woods gold exchange standard, where the US pyramided the issue of US dollars on gold and the rest of the world pyramided its currencies on the US dollar. Today, however, the US dollar owes it reserve status largely to the petrodollar system – the agreement of oil exporting countries, led by their lynchpin, Saudi Arabia, to price and sell oil in US dollars – and the resulting domination of US based financial networks. The upshot of all of this is that in order the buy oil (which everybody needs) and in order to engage in international commerce pretty much everybody everywhere must buy and hold a significant quantity of US dollar reserves. And as the demand for oil has increased over the past forty years so too has the demand for the US dollar. Thus there has existed a continuously buoyant demand for the holding of US dollars which is sufficient to outstrip the increase in any supply of those US dollars. This buoyancy of demand is also maintained and strengthened by the fact that several countries, most notably China, unit recently pegged their currency to the dollar in order to fuel export driven growth. In other words, they deliberately weakened their own currency by printing more of it to buy dollars, thus pushing up dollar demand and increasing Renminbi supply. Even though China has used most of those dollars to purchase US treasury bonds, thus nullifying the increase in demand for US dollars, it would still be the case that their own currency would emerge weaker (which if, of course, the entire point of the peg). This leads us onto the next problem and one that is most relevant to the recent past – that the reserve currency becomes a “safe haven” asset. The US dollar index, which tracks the value of the dollar against a basket of other currencies, has risen since 2011, particularly as a result of crises in the Eurozone which has served to weaken the world’s second most dominant currency, the Euro. Indeed, against the US dollar, every single major currency is lower than it was five years ago. This is something that US dollar doomsayers are yet to understand. Yes, the dollar is being printed into oblivion, but so too is every other currency; the dollar just happens to be the least rotten apple in the cart.

The effects of all this are that when the Federal Reserve prints fresh, US dollars domestic prices will rise. However, because the dollar is able to maintain its strength on the world stage vis-à-vis other currencies, holders of US dollars find themselves in the continued position of being able to source goods and services cheaper from abroad than they can at home. Indeed, for several decades now the US dollar has effectively been able to buy more than it is really worth. People happily hand over goods and services in exchange for the medium with which they can trade oil and engage in international commerce. Because the US can simply buy what it needs by printing a currency which everyone wants, the result has been to turn it into a giant consumer economy rather than a producer economy – an economy which has no need for jobs. After all, why not just put all of those jobless people on welfare that can be paid for with printed dollars which will buy them Chinese goods? Indeed, in spite of the resilience of the American entrepreneurial spirit, the US is, today, a very difficult place in which to be a producer. According to a ranking by the World Bank, the US was as low as the 51st best place in which to start a business, a paltry 39th best place in which to deal with building permits, ranked only 36th for the ease of obtaining electricity, registering property and for taxes, and 35th for trading across borders. Yet, in full congruence with what we have explained here, the US was, apparently, the second best place in the world in which to obtain credit! Other rankings tell much the same story, with Forbes placing the US at 23rd overall on their list of best places to do business at the end of 2016 – not too bad, you might say, until you realise that is was ranked first just ten years ago.

Needless to say, much of the global monetary situation may now be changing, particularly with moves by China – itself a big consumer of oil – to compete with the petrodollar system and to establish alternative clearing institutions for international commerce that are not reliant upon the US dollar. What we can see from all this, however, is that, on the one hand, to blame free trade for the flight of US jobs overseas is clearly incorrect; yet it is foolish and naïve for Austro-libertarians to defend free trade on the surface when the underlying property rights are far from free. The lesson to be learnt, therefore, is that when confronting issues that threaten our freedom, Austro-libertarians should remember to examine them on the deepest possible level and not simply react to what they see in plain sight.


View the video version of this post.

Advertisements